Sell-off in financial sector continues

BOSTON (MarketWatch) -- The U.S. financial sector traded lower in early action Friday, following steep losses Thursday after the Obama administration signaled a tougher stance on Wall Street by proposing size limits on banks and restrictions on so-called proprietary trading.

Obama's speech provided few specifics in terms of how big banks could get, or what types of trading they could engage in. However, it was seen as signaling a potential move back toward more separation of commercial and investment banking.

Wall Street firms such as Goldman Sachs Group Inc.
GS, +0.53%
and Morgan Stanley
MS, +1.90%
generate a significant percentage of their revenue through proprietary trading, in which they risk their own capital for profit. The firms converted to bank holding companies during the credit meltdown and tapped government assistance under the bailout package. Both stocks fell more than 4% on Thursday and were trading lower again Friday morning.

"The key question then becomes whether the proprietary operations can be held together and spun out in some way that preserves value for shareholders, or the talent is simply lost to noncommercial bank competitors," said Sean Ryan, analyst at Wisco Research.

"Critical questions were left unanswered. Chief among them is whether the constraints will apply to firms beyond commercial banks (the wording seems to suggest not, but this, too, is vague), and if not, under what conditions firms such as Goldman Sachs would be permitted to shed their bank holding company status," Ryan wrote in a research note. "Moreover, while the wording of 'proprietary trading operations unrelated to serving customers' suggests market-making activities could be exempted, that is far from clear."

Capital One Financial Corp.
COF, +0.76%
shares were off nearly 8%. The company late Thursday reported a fourth-quarter profit that beat estimates, but investors focused on the company's conservative outlook for 2010.

Huntington Bancshares Inc.
HBAN, +0.68%
slipped as well. The company Friday reported a fourth-quarter net loss of $369.7 million, or 56 cents a share, compared with a loss of $417.3 million, or $1.20 a share, in the fourth quarter of 2008. Provision for credit losses in the fourth quarter rose to $894 million from $475.1 million in the third quarter, and from $722.6 million in the year-ago period, the bank said.

"Going forward, we expect that the absolute level of the allowance for credit losses is likely to decline as existing reserves address elevated losses inherent in our loan portfolio," said Chief Executive Stephen Steinour. "While charge-offs are expected to remain higher than normalized levels in 2010, we expect 2009 will represent this cycle's peak."

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